UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 2, 2015 (July 2, 2015)
SURNA, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 000-54286 | 27-3911608 | ||
(State or other jurisdiction of incorporation) |
(Commission File No.) |
(IRS Employer Identification No.) |
1780 55th St., Suite C Boulder, Colorado |
80301 | |
| (Address of principal executive offices) | (Zip Code) |
| (303) 993-5271 |
| Registrant’s telephone number, including area code |
No change
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| [ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| [ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| [ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| [ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 1.01. Entry into a Material Definitive Agreement.
During the quarter ended September 30, 2015, Surna, Inc. (the “Company”) entered into seven financing agreements with four different accredited investors (each a “Purchaser” and together, “Purchasers”) totaling $1,175,400 and consisting of five securities purchase agreements, including both convertible notes (each a “Convertible Note”) and warrants (“Warrants”) to purchase shares of the Company’s common stock (the “Common Stock”), and two secured promissory notes (each a “Secured Note”) as follows:
Securities Purchase Agreements:
In July 2015, the Company entered into securities purchase agreements with two Purchasers, pursuant to which the Company sold and the Purchasers purchased, an 11% Convertible Note in the original principal amount of $106,000 and a 10% Convertible Note in the original principal amount of $165,000, with an aggregate original issue discount of $21,000 and Warrants to purchase up to an aggregate of 875,000 shares of the Company’s common stock, subject to adjustment as applicable (the “Common Stock”), for aggregate cash proceeds of $250,000.
In September 2015, the Company entered into three additional securities purchase agreements with the prior Purchasers and a third Purchaser, pursuant to which the Company sold and the Purchasers purchased 10% Convertible Notes in the aggregate original principal amount of $440,000, with an aggregate original issue discount of $40,000, and Warrants to purchase up to an aggregate of 1,750,000 shares of the Company’s common stock, subject to adjustment , for aggregate cash proceeds equal to $400,000.
The Convertible Notes incur a 10% or 11% interest charge on the Issuance Date and mature one year after the Issuance Date (the “Maturity Date”). Beginning two months after the Issuance Date, the holders of the Convertible Notes may convert the outstanding balance into shares of Common Stock at a conversion price equal to 80% of the lowest trade occurring during the 15 consecutive trading days immediately preceding the conversion date (the “Conversion Price”). However, if the Conversion Price is less than $0.05 (the “Floor Price”), then the Company, at its option, may elect to complete the conversion at the Conversion Price, or to complete the conversion at the Floor Price and to pay in cash the economic value of the discount. Within 90 days of the Issuance Date, the Company may prepay the Convertible Notes in cash at 125% of the outstanding balance. After 90 days since the Issuance Date, the Company may not prepay the Convertible Notes in whole or in part prior to the Maturity Date.
In accordance with the terms of the Convertible Notes, so long as the Convertible Notes are outstanding, upon any issuance by the Company of any similar security with any term more favorable than the terms in the Convertible Notes, including but not limited to conversion discounts, conversion lookback periods, interest rates, and warrant coverage, then the Holders will have the option to incorporate such favorable terms into the Convertible Notes.
The Convertible Notes include events of default, including, among other things, nonpayment of principal, interest, or fees, default under other debt or contractual obligations of the Company or any of its subsidiaries, failure to issue shares of Common Stock in accordance with the terms of the Notes, bankruptcy and insolvency events, or the Common Stock is suspended or delisted for quotation on the OTCQB marketplace. Following an event of default, the outstanding balance of the Convertible Notes will automatically increase to one hundred and twenty percent of such outstanding balance prior to the event of default without any notice from the holders.
The Warrants are exercisable at $0.25 per share (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction) (the “Exercise Price”) upon issuance and until the last calendar day of the month marking the five year anniversary of the Issuance Date (July 31, 2020 and September 30, 2020). Pursuant to the terms of the Warrants, so long as the Warrants are outstanding, if the Company issues or sells any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock, excluding shares of Common Stock issuable under Company equity incentive plans ( “Common Stock Equivalents”), pursuant to which shares may be acquired at a price less than the Exercise Price (such lower price the “Base Price”), the Exercise Price shall be reduced to equal the Base Price. However, no such adjustments shall be made in respect of an issuance of securities that is exempt under the 1933 Act.
Subject to limited exceptions, holders of the Convertible Notes and Warrants will not have the right to convert or exercise any portion of the Convertible Notes or Warrants, respectively, if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion or exercise, as applicable (the “Beneficial Ownership Limitation”); provided, however, that upon 61 days’ prior notice to the Company, the holder may increase or decrease the Beneficial Ownership Limitation, provided that in no event shall the Beneficial Ownership Limitation exceed 9.99%.
Secured Promissory Notes:
In July and September 2015, the Company issued two Secured Notes to a fourth Purchaser in the aggregate original principal amount of $464,400 with an aggregate discount of $34,400, for the purpose of financing raw materials and inventory. The Secured Notes have a term of five months, carry an interest charge of two percent (2%) per month on the outstanding balance and can be prepaid in whole or part without penalty. The Secured Notes are secured by a Purchase Money Security Interest in: (i) inventory purchased or assembled using the proceeds from the Secured Note and (ii) accounts receivable on sales thereof (including, for the Secured Note issued in September, an assignment of a balance due from a customer purchasing a portion of the inventory). Additionally, the Company has reserved 8,000,000 shares of its Common Stock as tertiary security for the Notes. All or a portion of the reserved shares would be available to the Purchaser to satisfy a default by the Company. As of October 2, 2015, the Company had not yet received the $210,000 to which it is entitled under the September Secured Note.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information contained in Item 1.01 above is responsive to this Item 2.03 and is incorporated herein by reference.
Item 3.02. Unregistered Sales of Equity Securities.
As previously reported in the Company’s Quarterly Report on Form 10-Q filed on August 14, 2015, for the period July 1, 2015 through August 13, 2015, the Company had received notices requesting it to issue an aggregate of 10,944,256 shares of its Common Stock to various holders of its outstanding Series 1 Convertible Notes representing $526,783 in principal and $61,196 in interest. Subsequent to August 13, 2015, the Company received notice from the remaining note holders requesting conversion of their notes. As a result of notices for conversions, the company will retire the entire principal balance amount of $1,336,783 and $137,678 in accrued interest effective as of September 30, 2015. A total of 25,169,786 shares of the Company’s Common Stock will have been issued with respect to the conversion of the entire principal and related accrued interest, of which 7,646,981 have yet to be issued and are not included in the shares of Common Stock issued and outstanding below.
The disclosure in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item. As of the date of this Current Report on Form 8-K, the Company has 115,006,109 shares of Common Stock issued and outstanding.
The Notes and the Warrants were issued in reliance on exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”). These transactions qualified for exemption from registration because among other things, the transactions did not involve a public offering, each investor was an accredited investor and/or qualified institutional buyer, each investor had access to information about the Company and their investment, each investor took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.
Item 7.01. Regulation FD
On October 1, 2015, the Company issued a press release for the Letter to Shareholders from its Chief Executive Officer. A copy of the press release is attached hereto as Exhibit 99.1.
The information in this Item 7.01, including the exhibit attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits
| Exhibit No. | Description | |
| 99.1 | Press release dated October 1, 2015 (furnished herewith). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| SURNA, INC. | ||
| Date: October 2, 2015 | By: | /s/ Stephen Keen |
| Stephen Keen, Chief Executive Officer | ||
EXHIBIT 99.1
BOULDER, CO – October 1, 2015 – Surna, Inc. (OTCQB: SRNA), a technology company that engineers state-of-the art equipment for controlled environment agriculture with special expertise in cannabis cultivation, today released the following Letter to Shareholders from its new Chief Executive officer, Stephen Keen:
As you may have read, I was recently elected by the Board of Directors to act as President and CEO of Surna, Inc., and I would like to take a few moments of your time to introduce myself. Along with the rest of our company (over 40 strong now!), I thank you for your continued support and I’m looking forward to guiding our company as it continues to grow and mature.
I’m excited about the incredible opportunity that Surna has to be the leading supplier for cannabis cultivation equipment. We have, in my view, an extraordinary team that’s heavily focused on research and development and commercializing our innovative products.
Moving forward, my primary focus as CEO will be profitability, and I believe we have developed a strong and clear path to profitability that includes: increasing gross margins by reducing manufacturing costs and overhead, monetizing service components, continuing to command a premium price for a premium product, and increasing sales through continued focus on existing products and productizing R & D efforts. I expect that positive cash flow will afford us better and stronger financing options in the future, which will allow us to fund our tremendous growth at a substantially lower cost of capital. We are making significant progress on all fronts, which I’ll elaborate on below.
Our ultimate goal as a company is to create, either directly or through joint venture, every technology product needed for a high-quality and efficient cultivation facility. In part, we would like to achieve this goal through commercialization of products—many of which I helped design in my previous role as VP of R&D—such as the Surna Reflector, a liquid-cooled full spectrum LED technology, full spectrum HID lighting, cannabis drying machines, air sanitizing technology, cultivation automation controls, and our very exciting hybrid building design. Once fully developed, we intend to offer each product either individually through multiple outlets or as a complete building package. These planned future products, of course, Are intended to be in addition to and compatible with our cornerstone climate control products.
To highlight what may be the most significant technology we have developed to date, I wanted to speak briefly about the hybrid building design. We call it a hybrid design because it marries the two best attributes of both indoor and greenhouse cultivation to yield a completely controlled environment that uses the sun as its primary source of light. Thus, we anticipate higher yields, quality, and control but with an energy footprint that is substantially lower than typical indoor cultivation facilities. We plan to further increase the energy efficiency by incorporating full spectrum LED light for supplemental lighting and a hybrid cooling design which will mix evaporative cooling and mechanical cooling to create an ideal environment while saving as much energy as possible. In addition, we plan to seal the grow spaces to the outside environment, eliminating external contamination, allowing for water reclamation (extremely important in all types of cultivation), and CO2 supplementation for increased productivity.
Over the last year, we’ve utilized the various talents of our entire engineering team to create the hybrid design packet and have filed a patent application on some of the technology created for it. The hybrid building design has been reviewed and approved by third party architects, structural engineers, Mechanical, Electrical, and Plumbing (MEP) services, and it is ready for permitting by the customer. We plan to offer the hybrid building as a kit with the exterior shell being supplied by a national building supplier. Construction can then be done by our preferred national builder or by a local builder using our plan set. We are currently in preliminary discussions with several potential customers for a Beta facility. Adding to the excitement about this project, nine mechanical engineering students from the University of Colorado at Boulder will be earning course credit for their work creating a scale model of the building and empirically testing our thermal performance calculations as part of their Senior Design Project (all in collaboration with some of Surna’s own engineers). Thus, we couldn’t be more thrilled about the progress of the hybrid building.
Our newest current technology, for which we are now accepting pre-orders, and a model of which is on display in our atrium, is our Surna Reflector. The Surna Reflector, designed specifically for double ended or ceramic High Intensity Discharge lighting (or “HID”), comes in three configurations—liquid-cooled, air-cooled, and vented—and can be integrated with our climate control technology or installed á la carte in any facility. The Surna Reflector contains patent-pending technology that allows for the production of 9% more usable light per watt of power consumed, with no change to the bulb or ballast. What this means is a potential for 9% more production in a cultivation facility with no additional energy costs—which, according to our calculations at current cannabis pricing and average yields, can mean up to $3,600 in additional revenue per light per year for cultivators. Additionally, we calculate that adding the water-cooling feature can reduce cooling energy costs by as much as 75% depending on how it is utilized and geographic location of the grow because our energy-efficient design allows for heat equivalent to 1,000 watts to be removed from the cultivation space using only 30 watts of fan power. With those numbers, I believe there is simply no other cannabis cultivation system commercially available that is superior to the liquid-cooled Reflector in efficiency for heat removal. Even at a premium price point, all versions of the Reflector have the potential for a payback period of just over three months making our reflector what we think is a very logical choice for any cultivator. Based on our research, reflector sales in the industry are estimated to be between 80,000 and 100,000 units per month. In a market of that size, even a 5% market capture could be a game changer.
As for existing product lines, we aim to continue to grow our engineering services revenue in parallel with our cornerstone products. We have recently partnered with a nationally known manufacturer of refrigeration equipment to provide components for our light commercial products, those items which are currently built in house, and to manufacture a Surna-specific line of products for our heavier commercial projects, dramatically reducing the stress on our internal manufacturing infrastructure and allowing us to continue to grow without a significant increase in overhead. Our increased buying power recently enabled us to secure a cost reduction of up to 40% for certain components.
Surna will no longer offer custom installation services; instead we are partnering with local installers with whom we will work closely to ensure successful installations, again bolstering gross margins and reducing overhead. We are able to partner with local installers due to a more robust engineering package and heavier engineering involvement throughout the installation process. Replacing our installation services with engineering services promotes on-time, on-budget installations and gives Surna an additional revenue stream. These engineering services are offered to our customers by the hour or by the project to help with any design related to the cultivation facility and are proving to be extremely useful to the customer and increasingly profitable for our company.
Surna’s cornerstone intellectual property was acquired in 2014 through the purchase of Hydro Innovations, a company that my wife, Brandy, and I cofounded in 2007. We knew the market had enormous potential at the time and we have been happily surprised by the industry’s growth. This is our eighth year in this industry, inventing and manufacturing products specifically for indoor cultivation, and we’ve seen cooling systems averaging two to five tons grow to cooling systems averaging 200-500 tons in what feels like the blink of an eye. These are very exciting times and we believe the business is ours to lose; all we have to do is execute.
As many of you are aware, Brandy serves as our VP of Sales and in that role has played a significant part in driving the revenue growth of our company. For those of you who are interested, we are happily married with two sons—Corbin, age 6, and Eli, 3 months old. We relocated to Colorado from Texas in 2012, and are in love with the Boulder area and with the business we are in. Brandy and I are the largest shareholders in the company and we’re both incredibly committed to the success of Surna. When we initially acquired the stock, we gifted 1.75 million restricted shares to family and friends who have supported us through the years in this industry. Since then, we’ve sold less than two percent of our holdings in private transactions since acquiring the shares 18 months ago. In addition, I requested that my pay not be raised from my VP salary despite the promotion to CEO, as I strongly believe that Surna’s success is my success, and I prefer to utilize cash resources growing the company.
I would also like to publicly thank our former CEO, Tom Bollich, for his return of 21 million shares to the Company after his resignation. Unfortunately, serving the cannabis industry seems to limit the pool of potential investors willing to put money in to our company, so our dilution and available financing terms aren’t as desirable as we would like; we hope that the retirement of those shares will offset some of the fundraising we undertake to fuel Surna’s growth. Any way you look at it, the retirement of those shares (17% of the then outstanding) was very beneficial to the company and its thousands of shareholders. Tom wants the company to succeed, and it was a great gesture from him on his way out of the company.
In conclusion, I just want to say thank you to all of our customers, supporters, investors, and shareholders. Your financial faith in us has given us access to funding and enabled us to stay dedicated to creating these revolutionary products and bringing them to market. Without your investment, Surna would be a moderately successful mechanical cooling company with some amazing ideas but little ability to productize them. Instead, with your help, we foresee our technologies leaving a lasting footprint on the industry—securing our future as a company and helping to shape the future of the industry as a whole. We appreciate your willingness to join in our efforts and assure you that we will work tirelessly to get you the utmost value in return.
Warm regards,
Stephen Keen
About Surna:
Surna, Inc. (www.surna.com) develops innovative technologies and products to monitor, control and address the energy and resource intensive nature of indoor cannabis cultivation. Currently, the Company’s revenue stream is based on its main product offerings – supplying industrial technology and products to commercial indoor cannabis grow facilities.
Headquartered in Boulder, CO, Surna’s diverse engineering team is tasked with creating novel energy and resource efficient solutions, including the Company’s signature water-cooled climate control platform. The Company’s engineers continuously seek to create technology that solve the highly specific demands of the cannabis industry for temperature, humidity, light and process control.
Surna’s goal is to provide intelligent solutions to improve the quality, the control and the overall yield and efficiency of CEA. Though its clients do, the Company neither produces nor sells cannabis.
Safe Harbor Statement
This news release contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features, products or services, or management strategies) and other factors discussed from time to time in the Company’s Securities and Exchange Commission filings. These statements are forward-looking and are subject to risks and uncertainties, such as economic, competitive, regulatory, and market conditions, so actual results may vary materially. You can identify these forward-looking statements by words such as “will,” “may,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan, “predict,” and other similar expressions. The company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Statement About Cannabis Markets
The use, possession, cultivation, and distribution of cannabis is prohibited by federal law. This includes medical and recreational cannabis. Although certain states have legalized medical and recreational cannabis, companies and individuals involved in the sector are still at risk of being prosecuted by federal authorities. Further, the landscape in the cannabis industry changes rapidly. What was the law last week is not the law today and what is the law today may not be the law next week. This means that at any time the city, county, or state where cannabis is permitted can change the current laws and/or the federal government can supersede those laws and take prosecutorial action. Given the uncertain legal nature of the cannabis industry, it is imperative that investors understand that the cannabis industry is a high-risk investment. A change in the current laws or enforcement policy can negatively affect the status and operation of our business; require additional fees, stricter operational guidelines and unanticipated shut-downs.
At the Company
Tae Darnell
VP of Business Development
(303) 993-5271
tae@surna.com
Investor Relations
David Kugelman
Atlanta Capital Partners, LLC (404) 856-9157 (866) 692-6847 Toll Free - U.S. And Canada
David.kugelman@surna.com
Source: Surna, Inc.